EXAM – Spring 2019
This is the exam for Economics and Strategy in the Digital Age (BA-BDMAO1021U). The following 5 pages
(excluding this cover page) contain a case description and questions related to this case.
Your hand-in can consist of maximum 15 pages, please check the rules at myCBS.dk. There will be no
further explanation or supervision during the examination period.
Please make sure to:
• Take your time and carefully read over the whole exam before answering the questions
• Answer all questions included in the exam
• Understand and answer the specific questions that are being asked in the exam
• Define the axes in graphs and name the respective units for the axes if available
• Cite all external material that you use in the process of answering the exam questions and provide a
bibliography in alphabetical order
• Do not copy and paste any text from external sources without properly citing it
• Make sure to hand in an original report that was produced by you individually
• Structure your answers in a way that allows the reader to easily follow your argument
• Make sure to check your final report for completeness before you hand it in
• Make sure to hand the exam in before the deadline
Good luck with the exam!
2
The Confidential Job Interview
After 3 years of education in the Bachelor of Business Administration and Digital Management, you are close
to graduating. You know that the demand for students that have training in the area of digitalization, especially
with a good understanding of the economics of digitalization, is high and you are looking forward to a bright
career. You are not sure whether you want to continue your studies with a master’s degree or directly enter the
job market and potentially later on continue with a graduate program.
To keep in contact with fellow students and your peers from the industry that you have met during internships
or job fairs you created a LinkedIn profile. When you logged into your LinkedIn profile today, you found an
interesting message from Jacob Hansen, a head hunter of one of the most established Danish head-hunting
agencies.
Dear >>Your name<<,
We are currently recruiting junior managers for a technology firm that wants to enter the
European market with its product. I have come across your profile and consider your background
and education highly relevant with respect to the profiles we are looking for. As our client is
working on a new proprietary technology related to the market entry, we have agreed to keep our
client’s information confidential until later stages of the recruitment process.
Nevertheless, I can give you some information with respect to the position and its remuneration.
Yearly Salary: 600,000 DKK
Location: Copenhagen
Key Requirements:
• Fluency in English
• Analytical and strategic mindset
• Strong skills in applying economic theory to practice
• Strong communicator
• Passion for customer satisfaction
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• Ability to work in fast-moving cross-functional environment
• Availability to travel for business
Job Profile:
• You take responsibility for estimating the economic impact of our product
• You provide detailed economic analysis for the management to make strategic decisions
• You are able to combine a solid understanding of technology and economics
• With the help of economic analyses, you make suggestions for the firm’s strategy
Please reply to this message if you are interested in further information and a potential
conversation.
Kind regards,
Jacob Hansen
The Headhunting Agency
Given this information you start to consider whether this job could be interesting for you.
- Please conduct a cost-benefit analysis of your consideration of whether this job is interesting for you
or not. In the analysis, please point out potential opportunity costs you face and explain whether you
decide to proceed with the application process.
Independent of your cost-benefit analysis, you decide to acquire further information from the head hunter and
move forward in the application process. After some messages back and forth with the head hunter, you are
invited to a full-day interview with the head-hunting agency. The head-hunting agency is still not willing to
reveal the identity of its client. During the interview process, you get the impression that the firm is particularly
looking for employees that have a good understanding of business, economics, and technology. Most of the
firm’s employees so far have engineering and computer science backgrounds.
To assess your skills during the interview, the interviewer is confronting you with some concrete tasks for
which you need to provide solutions. To start off with, the head hunter explains to you that the firm is close to
introducing its product to the market, but they are unsure about how to price their product for the European
market. They are struggling with estimating consumers demand for the product. Therefore, the head hunter
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asks you to suggest a method to approximate the demand that the firm will be facing when introducing its
product. - a) Suggest and describe a method that the firm could use to estimate the market demand it will be
facing when introducing its product to the European market.
b) Point out potential limitations to your method of approximating the demand curve.
Next, the head hunter explains that the firm is interested in decreasing consumers’ price elasticity of demand
to be able to charge higher prices without decreasing the quantity demanded as strongly. The firm aims to
extract more profit but the managers are not sure about how to achieve this. Again, he would like to hear some
suggestions from you about how to achieve this goal. - a) Provide two concrete suggestions of measures the firm can take to decrease consumers’ price
elasticity of demand.
b) Explain with the help of a visualization why decreasing the price elasticity of demand is in the firm’s
interest.
After completing the previous tasks, the head hunter wants to present you with the next task. To complete the
task, you need to have a look at the firm’s cost function. Costs are being presented in EUR. The firm estimates
its short-run cost function to look like this:
TC = 15,000,000 + 0.0002Q
Before the actual task is presented, the head hunter notices that it is time for a lunch break and does not reveal
which type of analysis you are supposed to conduct with the cost function of the firm. During lunch you receive
some time for yourself to refresh and relax but you cannot stop wondering about the structure of the firm’s
cost function revealed by the head hunter. Especially, as the head hunter keeps silent about which firm he is
actually working for you start to wonder what you can actually infer from the presented cost function about
the focal firm. - Given this cost function, provide a suggestion of what kind of firm might be recruiting junior managers
here? Explain with the help of fixed, variable, and marginal costs why you think this could be this type
of firm.
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After the lunch break, you continue with the tasks provided by the head hunter. You are being told that the
firm is currently applying for a patent that would allow the firm to keep other firms from being present in or
entering the market. The head hunter introduces you to the manager that would be your direct boss at the firm,
Agnes Pedersen. She tells you that the firm’s top management is under the impression that regulators might
intervene with the patent application to allow other firms to enter the market as well and guarantee a certain
level of competition. From related cases, Agnes has heard that regulators argue that they want to make sure
that total welfare as well as consumer surplus are being maximized and an efficient allocation is taking place
on a market. Given Agnes’ background, being trained as computer scientist, she is not sure what these terms
exactly mean. Therefore, she asks you to provide an explanation for how the market outcomes would differ
between perfect competition and a monopoly market.
The firm has estimated the market demand for its product and approximated the following inverse market
demand curve:
P = 100 – 0.00002Q
The total cost of production is as described previously (assume that the total cost of production is the same for
the entire market and the monopolist):
TC = 15,000,000 + 0.0002Q - a) Explain to Agnes how the market outcomes of perfect competition and monopoly differ for the given
market using both mathematical notation and a graphical representation. Make sure to explain and
point out consumer surplus, producer surplus, and total welfare.
b) How does the firm’s profit differ between the situation of perfect competition and monopoly. Give
reasons for why a firm in a competitive market could potentially operate.
c) Explain with your analysis why regulators are concerned about monopolies.
After your explanation, Agnes understands the difference and given the top management’s interest in
maximizing the firm’s profit, she prefers to use the patent, if granted, to deter other firms from being present
in the market. Nevertheless, she remains concerned about regulators interfering with the monopoly and asks
you for further advice in terms of how to convince regulators to allow the monopoly. - Present a logical argument for why it might be socially beneficial to allow the firm to operate as
monopolist in the market that could convince regulators to allow the firm to use the patent and prevent
other firms from being present in the market.
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Agnes continues to explain to you that she is leading the European team that is developing added services for
the product with the aim to increase consumers’ utility/satisfaction with the product. Currently, her team is
thinking about adding a functionality that allows users of the product to communicate with each other. She
wonders whether you can share your opinion on whether this will help with the roll out of the product on the
new market. - a) Explain which type of network externality the added service, allowing consumers to communicate,
represents?
b) Explain how the presence of such network externality would influence the demand and supply of
the firm’s product? Use a visualization to explain.
After completing this task, your full-day interview concludes. The head hunter escorts you out of their offices
and explains to you that he will get back to you regarding the outcome of this interview round the coming
days.
While you are waiting for feedback from the head hunter, you read a story in a Danish business newspaper
about a technology firm that is planning to enter the European market. You wonder whether this is the company
for which the head hunter is working and trying to potentially recruit you.
The article talks about the fact that the firm has applied for a patent and might try to prevent competitors from
entering the market with the patent. You discuss this article with one of your fellow students. She thinks that
the firm should definitely use the patent to keep other firms out of the market and maximize its profit as
monopolist, like you learned in your 2nd semester economics course.
You are not so certain whether this is the best strategy. The article also talks about the focal firm licensing
another patented technology from a potential competitor that might be interested in entering the market. The
focal firm is highly dependent on being allowed to license this patented technology from the potential
competitor. You decide to explain to your fellow student that it might be the case that it is more beneficial for
the focal firm to let this potential competitor enter the market. - Design a simultaneous game with two players, the focal firm and the potential competitor that has
decided to enter the market. Use the game to explain that depending on the payoff matrix, it might be
beneficial for the focal firm to let the competitor operate in the market and not use the patent against
the competitor. Define all necessary elements of the game and explain which strategies the players
should choose.
Sample Solution